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What’s Up with Gift Cards

I walked into a local grocery store here in Dallas yesterday and couldn’t believe the number of gift cards they had hanging there. They nearly needed a complete aisle in the store to display them all. It seems like gift cards are becoming more prevalent everywhere you look. You could probably buy one for The Home Depot at Victoria’s Secret. It is stupid.

I do buy gift cards sometimes at the grocery store locally. Our grocery gives 4 X the gas points when you purchase gift cards. So if I buy $250 worth of cards at The Home Depot or Lowes, that is $1 off a gallon of diesel. So, I save $35 when I’m going to buy something anywhere.

I don’t know this new fascination with gift cards. And I don’t have any idea why they sell gift cards in the grocery stores. Maybe the retailer pays the grocery a percentage to sell them, I don’t know. And I can’t think of any reason that all these stores want the gift cards out there other than a certain percentage of them will never get redeemed. I came up with this because I know at some bike shops, they are sitting on thousands of dollars worth of gift certificates that no one ever uses.

I looked it up and this place says that only 7% of the gift cards go unredeemed. I don’t think that number is high enough. Not even close. I’ve had a ton of gift card go unused. I don’t know how many, but some of the ones I used had a expiration date or they started losing value every month after a year or so.

Even if you use the low 7% number, that means that each American household has $300 of the things laying around. That number seemed big. It’s about 30 billion dollars total. That is a lot of free money being “gifted” to the big retailers from us. I think that is just what they want.

This is just a small portion of the offerings. If you double click, you can see they offer a Facebook gift card. I have no idea what you could use that for.

This was my favorite gift card I saw yesterday. A gift card for gift cards. When you thing about it, it is probably the best gift card someone could give you.

I don't know if it is local thing from Dallas, but they offer Southwest Airlines gift cards here. That wouldn't be such a bad one to receive.

Because it’s so hard to give a gift that creates rather than destroys value, gift cards are horrible. A person would have to value the item they’re getting w/ their gift card more than the nominal value of the card (or, to break even, at least as much). It’s hard for someone else to predict how the recipient will value something. Consequently, almost all gift giving destroys value. Christmas is the worst of the worst–value destruction on a massive scale. The answer? Cash. I’m pretty sure that any other fungible commodity (like a gift card, or a barrel of west Texas crude) will have transaction costs and/or search frictions that lower it’s value relative to cash. If you have to give an actual gift, try to find something that someone doesn’t know they value highly until after they get it. Like a great bottle of wine (assuming they really like wine) or freshly smoked salmon or Gore cables (installed). But predicting preferences is hard and unless the card is for some store that is eye-opening and mind blowing, gift cards are horrible.

It has to do with the float. Banks make money on float, insurance co’s make money on the float.

At christmas, starbucks probably sells a hundred million dollars worth of gift cards right? (10 million cards for 10 bucks?… prob more).
That balance is paid to them pretty immediately, however it takes months to spend it all. They sit on that money and make money on it.

That is not to mention how much money is sitting on cards that will never be used, like 30 cents here and there with an order of magnitude of 10 million cards, you suddenly have 3 million bucks. It might be spent 1 day, it might not, but they can make money off it it sitting there.

They are forced on consumers as a good idea because they are a great idea for companies.

The idea of float is true for banks, but it’s not entirely accurate to call insurance a “float” — it doesn’t really behave the same way. Insurance is only profitable for a company in volume. Otherwise, the risk/reward potential tips too far in favor of the insured. If you want to understand the real nature of insurance, check out a niche in that market called “re-insurance”. I worked in that area for a while as an actuarial consultant, and the models are totally different there – much more qualitative because even high probabilty quants carry too much risk given the magnitude of the payouts.

Anyway, as to gift cards, float doesn’t apply in most cases unless the company is either in a pure service industry (more on that later) or it employs a Just-In-Time (JIT) inventory model, which very few companies do. In fact, for most companies, gift cards work the opposite way: they are ways to ensure at least some recoup on inventory already paid for that will otherwise sit on shelves. In fact, not using them could actually cost the company depending on the industry because there are costs associated with unused inventory. The fact is, most companies have to plan ahead and can’t afford to underestimate inventory needs or else they’ll lose customers, which is why you often see inventory levels higher than you’d reasonably expect them to be. The risk associated with customer loss is higher than the cost of carrying inventory, and that cost can be offset by services that are unrelated to specific inventories, such as gift cards.

Now, not all of this applies to every kind of company offering gift cards, but the basic idea still holds. For example, in the picture Steve posted, there are AMC theater cards. Think about why AMC would offer a card — they actually need to pre-pay for pretty much everythign relevant to their business, don’t they? They have to build the theater, manintain it, pay for the electricity, air conditioning, and they also have to pay employees and pre-make the refreshments. In their case, a gift card serves an important function way beyond the notion of float — it actually guarantees a key element of their revenue stream. They don’t make more if you don’t use it because the theater has to be ready for you to show up anytime, and that’s where ALL of their costs are. If you show up, it doesn’t get wasted on an empty theater, but if you don’t and you had a gift card, it’s still as if you went from a financial POV.

Gift cards are a means by which companies can offset negative elements of their business model. Personally, I don’t mind getting them because to me it’s like found money for when I need something form that store or industry. Cash would work just as well, except some people forget about the cash ina card they receive and essentially take it out of circulation, which isn’t good for anyone. (No kidding — this is a real issue – some peopel even become sentimental about the money they received and never spend it, which is a total waste!) Gift cards at least keep the revenue in play.

Me thinks most people these days are too lazy to pick out a thoughtful gift. These cards are their “easy” button. Just plunk down your debit card and get a card.
Saw a sign on a pawn shop window the other day that said, “We buy gift cards!” So if you need the cash I’m sure you can get pennies on the dollar for your hockable gift card. So then who buys them in the pawn shop? Ha!

I’m a little surprised to read all of the hostility towards gift cards on a cycling blog. Maybe I’m the only one has received U.S. Postal Team jerseys from well intentioned friends and family members?
Folks know I am passionate about cycling, they don’t know how useless a Postal team Jersey is for me.
They certainly don’t know that what I REALLY want, is a Park Tool torque wrench or that I would get interrogated by my wife when the $50 charge shows up on our AMEX bill.
Sure, cash is nice, but cash isjust going to be comingled with everything else and end up being spent on the next industrial park crit . . . .
A gift card, especially something super flexible like an Amazon card, assures that the money is spent on an actual GIFT, while maximizing the value which Joe Bear alluded to.
My coworkers were kind enough to get me both an Amazon and Atlanta Falcons gift cards for my birthday last week. So if you will excuse me, there is a Park Torque wrench I need to order!